Jewellers Hedge to Cover Risk of Rising Gold Prices

Chennai: Constantly surging gold prices is a challenge for jewellers. While they are able to cover most of the risk by hedging and quickly replenishing stocks, making charges come in handy for whatever losses remain.

Gold prices have gone up 24 per cent since the beginning of the year and in the recent past, it has been surging on a daily basis. The dynamic gold prices usually puts the jeweller in a sticky situation.

“Some of the large jewellers protect themselves from the vagaries in the gold market by hedging at the MCX,” said Tom Jose, former CFO of Joyalukkas.

When the jeweller buys physical gold from the spot market, he sells equal quantities of the metal in the futures market. The gains made by selling will hedge the loss on buying.

However, most of the jewellers replenish the gold the same day when they make a sale. When the gold prices are moving up throughout the day, they sell the ornaments at a margin of Rs 200 per 10 gm over the daily rate. If the prices go up beyond Rs 200, they update the rates.

“if they still end up paying more while replenishing the stock in the evening, the loss is covered by making charges on the ornament which can range from 3 to 30 per cent and sometimes go up higher if the ornament has intricate craftsmanship,” said a gold expert who did not want to be named.

Jewellers also keep the coins and medallions sales a smaller part of their business as the making and transactional costs cannot be charged beyond 2 - 3 per cent. Moreover, they deduct around 2 per cent while buying back coins and medallions.

When the prices fall, the value of the stocks in the store depletes. The revenue loss largely remains in the books and does not affect the operations.

The jewellers also take care of the losses from dynamic gold prices while offering gold investment plans. Several jewellers run the one-year scheme in which the customer puts in money for 11 months and the jeweller pays the instalment of the 12th month.

“The jeweller buys the gold equivalent to the monthly payment on the same day and does not defer the purchase till the end of the scheme. The customer can redeem the money only as a piece of jewellery and not in cash, coins or medallions,” he said.

The 12th instalment and losses due to rising gold prices are taken care of by the making charges and wastage charges, which also vary from 5 to 18 per cent. The final price of the jewellery is calculated by adding making charges, wastage charges, GST, hallmarking charges, and the cost of precious stones, if any, to the gold rate.